Hello again JohnM,
You keep saying these things that strike chords from my own experience LOL
I should perhaps, make clearer than I might have, that almost all of my covered call writing is and will be on shares we already hold. Some small portion will be buy/write but that money is largely for learning. I hope to get sufficiently comfortable with this to produce a reasonable income flow until stock prices start a longer term move back up. So I'm less worried about downside risk (since we plan to hold the shares) than I am about upside (losing the gain--I have some fear that we've ridden the stock prices down only to lose some of the gain back up because I'm into cc writing).
I certainly cannot claim to be a seer of the future, but I can tell you from my own experience that worrying more about losing upside potential and less about downside risk can be expensive. The worst loss I have booked during this horrendous market slide was on what was recently considered by some as one of the world's ten best companies. I'm sure some of you will fall down with side splitting laughter when I tell you that I was actually accumulating shares of LU starting in the high 40s.. after all it had recently been an $80 stock. I kept waiting and waiting for a nice bounce to write calls at a decent premium, gradually accumulating some more in the belief that somebody someday would get this company back on track, and that the bottom had to be near. I never did write those calls, and finally abandoned the position with over 50% loss. Good thing I did, since it has fallen more than 60% from where I finally sold it. In retrospect, I would have been far better off writing several rounds of calls as it retreated even though it meant a sure loss would have been taken if I got called out, or just taking the loss to close the position much earlier. It would have been a smaller loss than the one I ultimately took. That's easy to say looking back at the past, but this example is a vivid reminder that some stocks never come back. There is no certainty at this point that LU will ever rise again.
I divulge this personal experience because it supports a view I am working to own for myself that how you get into a position is irrelevant for how you treat it going forward. There can be exceptions to this because of tax treatment based on holding time, and possibly other special circumstances, but for anyone who is free to sell stock anytime all that matters is the future, not the past. If I have 500 shares of a $50 stock at any moment in time, then I have $25,000 just as surely as if I have no stock and $25,000 cash. With almost literally a keystroke these days I can go from one to the other. Psychologically it may seem different if I paid $10 a share instead of $100 a share for that $50 stock, but that is just a trick of the mind. The past cannot be altered. What matters is that I make the right choice to turn that $25,000 into $26,000 and then $50,000 instead of into $24,000 and then $15,000, etc. While my heart may recognize a distinction between writing calls against stock I own and doing buy/writes my brain tells me that uncovered stock is the same as cash at any moment. I choose to go forward in cash, in uncovered stock, or in CCs (or another of many strategies not in the scope of this thread). I have not achieved nearly this level of objectivity in my own trading/investing, but I hope one day I will and I'm convinced that I will be the better for it.
Unfortunately, I made the mistake of thinking I would be sharper in the evening than in the morning. However, went to dinner at a marvelous fish place on the Hudson River, looking up at the Manhattan skyline.
Possibly the best choice you made today, and not a mistake at all. :))
Dan |
